Deficit, disinvestment and PSUs: Enough of smoke & mirror

After months, if not years, of inaction, there is a buzz around disinvestment again. Not directly – that would be too much to expect from a government that has shied away from any kind of reform – but tangentially. So, like ‘disinvestment’, that uniquely Indian euphemism for ‘privatisation’ – the term used to describe the sale of government’s stake in PSUs elsewhere in the world – the government is resorting to various ruses to sell its stake in PSUs instead of selling shares directly on the market. The recent decision by the Securities and Exchange Board of India (Sebi) to create a new institutional placement programme (IPP) that allows promoters to either issue fresh shares or sell existing shares directly to qualified institutional buyers (QIBs) such as banks, insurance companies and mutual funds is one such ruse. Permitting PSUs to buy back their shares is another. Creating a holding company, funded by public sector banks, to transfer underlying assets of the state-owned Special Undertaking of the UTI (SUUTI) is a third. All three routes, reportedly being mooted under an ‘extended disinvestment framework’, have been widely perceived (and criticised) as backdoor routes to disinvestment. Take the first. There are many PSUs where government stake exceeds 90%. The IPP will allow government to sell its holding or issue fresh shares to QIBs. This will kill two birds with one stone. It will enable PSUs to comply with listing requirements by bringing promoter shareholding in PSUs down to 90%. At the same time, the sale proceeds will enable the government to bridge the shortfall in disinvestment proceeds vis-A -vis Budget estimates for the current fiscal year. Against an estimated Rs 40,000 crore to be raised through disinvestment, government has raised less than Rs 12,000 crore to-date. Given our huge fiscal deficit (already 85% of the target) and the giveaways inevitable in the run-up to state elections, the government cannot afford to be indifferent about disinvestment. There is the possibility that QIBs might not be too keen on investing in PSUs whose operations are often hamstrung by government interference, in which case Sebi’s efforts might be in vain. But that is small risk. A nod and a wink in some cases and other less subtle forms of arm-twisting in others should normally suffice to ensure adequate interest from QIBs. The second route, allowing PSUs to buy back their shares, is just as fraught since PSUs are not keen. They would rather use their cash, and many of them have surplus cash, to fund ambitious expansion plans. But few PSU chairmen would be able to resist for long if government insists on their falling in line. The third, offloading SUUTI’s holdings in blue-chip companies, to a special purpose vehicle (SPV) funded by banks is the most ingenious. Under this proposal, the government’s stake in companies such as ITC, Axis Bank and Larsen & Toubro, presently held by SUUTI, an SPV created in 2002 after the UTI US-64 bailout, is to be transferred to a new SPV.